How should you plan for your children’s overseas education

Planning for your child's overseas education?

Sending one’s children to a foreign country is not something new for Indian parents. With the number of quality universities and institutes in India still at a pretty dismal level and with the growing student population, it is not a surprise that for most urban parents, sending their children to an overseas university is still top priority. The number of Indian students studying overseas has increased from 66,713 in the year 2000 to over 753,000 in July 2018. 

Source: Data from Unesco Institute of Statistics and Ministry of External Affairs

Finances

Nothing good comes cheap. The same goes for quality education from a reputed foreign institute. As per data from US Department of Education, the average annual cost of an undergraduate program from a private American institute is approximately US$ 43,000.

For most Indian families shelling out this kind of an amount at one go is impossible. Hence, providing for child’s overseas education is getting out of reach, and parents must rely on loans at this point. Even for the more affluent, the depreciating rupee only makes financial planning that much more difficult. Wouldn’t they be delighted to be able to save in dollars every year and earn a fair return on that to build a corpus that would meet the requirements?

Hedge against the Dollar

Our research team has been exploring different possible products that may work well for families looking to send their children overseas for higher education. One such product that catches our attention are Indian Mutual Funds investing in US equities. There are a few fund houses offering this product. Some of the fund names are listed below.

  1. DSP US Flexible Equity Fund
  2. Edelweiss US Value Equity Fund
  3. Franklin US Opportunity Fund
  4. ICICI Prudential US BlueChip Equity Fund
  5. Motilal Oswal Nasdaq 100 FoF
  6. Nippon India US Equity Opportunity Fund

US Equity Investment vs Fixed Deposits

We made a comparison of investments made in the ICICI Prudential US BlueChip Growth Fund against investments in 1-year fixed deposits rolled over for the period. An investment of Rs. 2,00,000 has been assumed on the 1st of January every year starting from January 2013 until January 2019. Therefore, a total investment of Rs. 14,00,000 (7 instalments of Rs. 2,00,000 each).

Overseas Education - Investment Option
   US Bluechip FundFixed Deposits
YearCumulative Investment (in INR)Cumulative Investment (in USD)Units BoughtEnd of Year Value 1 Year FD RatesEnd of Year Value 
Jan-132000003657181982833499.25%217500
Jan-144000006888128455497828.75%455075
Jan-1560000010045112937502059.00%709119
Jan-16800000130641128710826558.25%975030
Jan-17100000015999990614541847.25%1256107
Jan-18120000019140873717257286.90%1554394
Jan-19140000022019837525563476.75%1810419

Units Bought based on NAV of ICICI US Bluchip Fund on 1st working day of respective years

FD Rates – SBI 1 year rates applicable on 1st working day of respective year

If we were to convert the amounts to dollars, the invested amount would have been equal to US$ 22,019.44. As you can observe from the table above, the value of the investment on 21st Dec 2019 for the investments in the Bluechip fund is over Rs. 25 lakhs. While the investment in FD only yields a tad over Rs. 18 Lakhs. In dollar terms these would be worth US$ 36,260 and US$ 25,680, respectively.

 US BluechipFD Deposits
Total Investment (USD)$22,019$22,019
Total Investment  (INR)₹ 14,00,000₹ 14,00,000
Value on 21st December 2019 (USD)$36,260$25,680
Value on 21st December 2019 (INR)₹ 25,56,347₹ 18,10,419
Pre-Tax IRR (USD)12.13%4.47%
Pre-Tax IRR (INR)15.11%7.20%

assumed exchange rate – Rs.70.50/$

 

Advantages

An investment in the US equity funds offer a number of benefits. Some as listed below:

  1. Higher Return – an investment in the mutual fund has returned a pre-tax INR IRR of 15.11% and a USD IRR of 12.13%. On the other hand, the fixed deposits investments have massively underperformed with the INR IRR at 7.20% and the USD IRR at 4.47%.
  2. Tax Treatment - Post tax the difference would be wider. The applicable tax on the fixed deposit is 30% (assuming highest tax slab), while the International equity mutual fund is treated as a debt fund investment. Therefore, it is taxed at 20% with the benefit of indexation (assuming held for 3 years from date of investment).
  3. Hedge – It offers a great hedge to the appreciating US Dollar.
  4. Diversification – Most of the investments for Indian households are in domestic securities. An investment in an international fund presents a good diversification.
  5. Tax Deferment – In case of fixed deposits, there is a TDS deducted by banks on an annual basis and the tax on income accrued needs to be filed and paid every year. Contrary to this, the tax on gains from mutual funds is payable only after redemption of the units.

More Information:

ICICI freedom sip plan
What is Fixed Deposit: Meaning, Interest Rates, Benefits, Risk, Bank fd vs Corporate fd
How to Invest in Mutual Funds?
Best Mutual Funds to Invest in for Long Term in India
Section 80D - Deductions, Tax Benefits, Claim Amount, Example
Deduction under Section 80TTA
What is Rupee Cost Averaging in SIP?

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